Should you transfer out of your Final Salary Pension scheme?

If you're thinking about cashing in your final salary pension, we look at the advantages and the disadvantages, plus where to get unbiased advice.

16/08/2017

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should you transfer out of your final salary pension scheme?

holly thomas

Getting advice is essential if you're thinking of transferring out of a final salary pension.

Getting advice is essential if you're thinking of transferring out of a final salary pension.

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So-called gold-plated final salary scheme members could be forgiven for being seduced into giving up their rights to an income for life in return for a cash lump sum.

Transfer values, which determine the amount on offer from old employers running the schemes, have been rising prompting more and more people to consider cashing in.

Figures from pensions transfer administrator Xafinity show the amount you could get has soared 14% in a year. For example, a 64-year-old man with a scheme due to pay out £10,000 a year at age 65 would have been offered £206,000 last year. Today that offer would be made at £235,000, according to Xafinity.

In a survey of 800 financial advisers, Royal London found that one in four had dealt with transfers worth 30 to 40 times the annual income offered by companies.

As a result of the large cash sums on offer, the number of people who have given up their final salary pension scheme entitlements so far this year has soared by 168% compared with the same period in 2016.

Some 80,000 defined benefit transfer values were requested in the year to the end of March, according to estimates from the Pensions Regulator.

But while a cash windfall might sound appealing it’s important to weigh up your options carefully to make sure you don’t run out of money in retirement. Here’s what you need to know:

The advantages of transferring your final salary pension

By redirecting your money into a private pension you gain greater number of investment opportunities - as well as greater potential for growth.

There are also a number of tax benefits to being in control of the cash. You could spend down your estate to reduce your inheritance tax bill and leave the pension cash to heirs. You can also control your level of income to ensure you don’t slip into a higher rate tax band unnecessarily.

Transferring can work well for certain groups of people in particular. Those who have built up a few smaller pensions from having several jobs throughout their working life might consider it. Cashing in might also be the right move for a single person with poor health as they could receive less income over their lifetime through a final salary scheme than having access to a lump sum.

Also, any member of a very large scheme spooked by others that have collapsed – such as BHS – might want to exit while they can.

The disadvantages of transferring your final salary pension

Savings in a personal pension are at the mercy of the stock market which means its value could fall, leaving you with less to live on.

Cashing in a final salary pension means sacrificing a guaranteed income for life, which gives you peace of mind that you won’t run out of money in retirement. You might also lose valuable benefits – you might be giving up inflation protection offered by some schemes, which means you could lose out to the increasing cost of living.

Also, final salary pensions are required to offer benefits to a surviving widow or widower if you die after reaching the scheme's pension age. By exiting the scheme, you would lose this benefit.

Speak to an independent financial adviser first

There’s no one-size-fits-all answer to whether you should transfer out. It’s certainly an avenue worth exploring – but tread carefully as once you’ve cashed out, there’s no going back.

The bottom line is, getting advice is crucial. In fact, if your transfer value is worth over £30,000, under rules set by the Financial Conduct Authority (FCA) you have to have an independent financial adviser to help you. This advice must be provided by (or checked by) a specially-qualified pensions transfer specialist.

But even for smaller sums, it could be worth considering paying an adviser to help with your decision.

How the Financial Conduct Authority can help

The FCA has recently published proposals to make the advice process even more robust to ensure the right people transfer out. Search for a local independent adviser at Unbiased or VouchedFor, which allow consumers to rate and review advisers they have used. You can also search the Financial Services Register to find out whether a firm or individual adviser is regulated by the Prudential Regulation Authority and/or the FCA.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.